Building a Buy-to-Let Portfolio
The process of building a Buy-to-Let property portfolio can typically be broken down into four major steps: starting the portfolio, growing the portfolio, managing it and selling it.
This represents the natural life of a portfolio and can run from your first investment till your last, ensuring you generate the maximum returns possible before selling for later life.
For investors, a property portfolio is usually a natural step after their first property investment. As a popular asset that can be easily adapted into many investment portfolios, property is ideal for building consistent, high-level returns alongside natural market growth.
Building a portfolio can be done in a number of ways and while every investor will be different, the opportunities are there for everyone.
How to Start a Property Portfolio?
As with any investment, starting a property portfolio is a matter of preparation. Building a portfolio should be largely dictated by your financial goals. If you’re looking to build long-term returns for a retirement fund, your entire strategy will be much different compared to those who’re looking for short-term gains.
Your strategy will be largely dictated by your income, your goals and three aspects of the potential investment: the location, the past performance and the tenant demand.
Location feeds into every aspect of your investment, from the market performance to the tenant demand and thus, is the most important metric to follow. Picking the right area is vital – do you want to target a student demographic or professional workers? This question alone will decide your chosen location and thus, your chosen strategy.
Past performance and tenant demand are fairly self-explanatory but just as important. You want to know how your chosen property investment (if it’s existing) or the local area (if it’s a new build) has performed in the past, allowing you to make more informed planning decisions going forward.
When you’re building out your strategy, consider whether you’re looking to build capital growth or rental yields. Many BTL investors focus on rental yields because consistent rental income over the long-term can benefit from compounding and be reinvested at a later stage.
Don’t forget to remember the tenant. At this stage, it can be easy to get wrapped up in the investment and forget about the most important aspect of the investment itself – the people that will live there. If you work hard for the tenant in the first place, it’s likely that you’ll maintain a relationship that mitigates void periods further down the line.
How to Grow a Property Portfolio?
If you’re looking to scale your portfolio, starting small and maintaining consistency is vital – you don’t want to take on multiple properties that you can’t manage or develop.
Similarly, reinvesting your profits is a great way of scaling at the right pace. While it may take a more patient approach, as long as you maintain your cash flow, reinvestment can lead to very positive results. A common method of property investment is rebuilding your ‘deposit pots’ with rental income to put towards an additional property.
Consolidation can be a great way of maintaining multiple properties at the same time, especially if you’re struggling to confidently manage the associated finances. By wrapping your loans or repayments into one, you can get a better idea of what you’re paying and better plan around these payments.
That said, while consolidating payments can be beneficial, you’ll want your investments themselves to be as diverse as possible. Diversification is vital for scaling efficiently. Identify a range of quality locations alongside a number of different property types, building out a broader portfolio that can better weather market changes.
Always remember that in terms of growing a portfolio, time is your most important resource. Property and yield building inherently suit a long-term strategy centered around a quality product and you shouldn’t be afraid to opt for quality over cost. While cheaper products may lower the barrier for entry, over time they’ll struggle against a high-quality development.
At this point, you should also be maintaining your holding pattern. Ideally, you’ll have thought about this during the planning stage of your investment but understanding that you’re planning to hold for five, ten or even 15 years can help you make more informed decisions on future goals.
Managing a Property Portfolio
As long as property continues to be a popular investment, we’re seeing broad differences in how landlords are approaching management after building a Buy-to-Let portfolio. There’s no cut-and-dry answer to the ideal management style as it depends on the individual but two common styles are hands-on and hands-off investors.
Hands-on investors will typically do everything themselves, from sourcing tenants to performing maintenance. This type of management is ideal for the investor that wants full control over their investment or wants to save money that would otherwise be spent on these supporting partners.
Hands-off investment is the alternative option for investors that cannot commit to full-time management of the investment or those investing from overseas. In both cases it’s unfeasible that these landlords would be able to do everything themselves, making working with a trusted partner necessary.
Property managers, letting agents and full-service developers are all potential partners in a property network that can help collect rent, source and vet tenants, market and maintain the property as well as help with tenant challenges.
It can also be a good idea to keep a separate pot of money that can be accessed during a challenging period in the investment. When void periods are multiplied across a portfolio, it can cause major issues down the line which could completely derail an investment.
Finally, building a portfolio through a limited company is a method of investment management that is quickly growing in popularity. Offering a number of unique benefits that individual investors wouldn’t usually experience, a limited company can offer flexibility when building the portfolio over the long-term.
Selling a Property Portfolio
If the time comes that you’re looking to sell a property portfolio, your options really depend on the size of the overall portfolio.
For landlords that have a couple of properties, these can typically be converted back to traditional residential houses that can then be sold to homeowners through an estate agent or bought by another investor.
For landlords with a wider portfolio – usually 10 or more properties – the most common choice is to sell to another landlord. That said, you could also look for a private buyer through your own network, sell via a landlord-to-landlord service or find a developer.
As you’d imagine, selling an investment portfolio isn’t easy but if your properties are in good locations, in good condition and delivering good returns, it’s much more appealing to other investors.
Keeping a track record of your past performance is vital in this situation, allowing you to demonstrate the value that your investments could offer another investor.
The major consideration for any investor selling a portfolio is the tax implications – mainly Capital Gains Tax. It’s always best to speak to a financial advisor, giving you a good idea of how you can mitigate costly sales fees down the line.
Finally, consider that building a Buy-to-Let portfolio through a limited company will affect the sale process. Your ‘exit plan’ should be a huge consideration when considering incorporation, as selling during retirement through a company is much less effective than holding it for relatives, for example.
A Buy-to-Let portfolio is ideal if you’re looking to generate consistent returns in a stable and robust market. Property still represents one of the most popular investment assets in the world and a diverse portfolio of multiple properties is one of the most flexible investment vehicles available today.
Building a portfolio may seem overwhelming at first but as long as you perform your due diligence, it’s a relatively straightforward process that can be scaled quickly and efficiently, provided you have the capital, leverage and research in place.